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As ES Realized Vol Continues Spike, It Is Time For The CME To Hike ES Margins To "Protect Investors"

Tyler Durden's picture


The CME's decision to lower ES margins two days ago may enter trader folklore as the most incompetent decision ever made (and we won't get all tinfoily on them: after all we know the CME doesn't see to manipulate markets with margin moves: they told us so themselves). Which is why in order to keep up with the exchange's primary prerogative of "intense focus on risk management" it is now time to not only undo that decision but to actually hike ES margins. Because as the chart below shows, since the margin cut on May 31, realized vols have surged!

And here is where the CME announced the ES margin cut:

Below we remind readers what the salient points are per the CME when it comes to making margin hike decisions. We have yet to see an explanation for margin drops.

At CME Group, we’re intently focused on risk management. In over a century, we have not experienced a default. In more than a century, there has never been a failure by a clearing member to meet a performance bond call or its delivery obligations; nor has there been a failure of a clearing member firm resulting in a loss of customer funds. As part of our overall risk management program, margins are adjusted frequently across all of our products based on market volatility. When daily price moves become more volatile, we typically raise margins to account for the increased risk. Likewise, when daily price moves become less volatile, margins typically go down because the risk of the position also decreases.

Margins are set as part of the neutral risk management services we provide. They aren’t a means to move a market one way or another, or to encourage or discourage participation from one kind of market participant or another. Rather, margin is one of many risk management tools that help us assess overall portfolio risk to protect market participants and the market as a whole.

At CME Group, CME Clearing is responsible for setting margins. In doing so, we consider several factors to compute the gains and losses a portfolio would incur under different market conditions. Then we calculate the worst possible loss a portfolio might reasonably incur in a set time (usually one trading day for futures markets).

In other words: it's time ladies.


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Thu, 06/02/2011 - 12:08 | 1332591 Dolemite
Dolemite's picture

What a bunch of clowns. Cant trust anyone of them....

Can only trust your physical PMs and these sweet sweet charts ;)

Thu, 06/02/2011 - 12:15 | 1332638 French Frog
French Frog's picture

Isn't the idea to lower ES margins to facilitate a proper, deep, scary..... correction or market downturn so that qe3 becomes unavoidable?

Thu, 06/02/2011 - 12:08 | 1332605 nathan1234
nathan1234's picture

For those who wish to sell their silver and gold, margins ( required value) may be deposited in that form. This is the only way the Comex can survive.


Thu, 06/02/2011 - 12:12 | 1332607 PaperBear
PaperBear's picture

"In over a century, we have not experienced a default. In more than a century, there has never been a failure by a clearing member to meet a performance bond call or its delivery obligations;"

Laugh loud and long when the CRIMEX defaults on silver - 60 days and counting.

Back up to $36/oz

Thu, 06/02/2011 - 12:44 | 1332750 augie
augie's picture

in more than a century!? like that is even a blink of an eye in the history of the banker manipulation. Outrage! Loud Noises! Strong Words! ALL CAPITAL FONT! (yeah, i went there)

Thu, 06/02/2011 - 13:11 | 1332901 NotApplicable
NotApplicable's picture

JPM will deliver every single contract.


In the form of SLV shares.

Thu, 06/02/2011 - 13:33 | 1333028 augie
augie's picture

I see what you did there, you tricky banker you. You're tricky, i got my eye on you.

Thu, 06/02/2011 - 12:11 | 1332614 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

VIX still acting like there is no volatility. Take out the 'japan incident' from the VIX graph and the VIX has stayed in a lowly range for 6+ months!

Thu, 06/02/2011 - 12:12 | 1332619 AldoHux_IV
AldoHux_IV's picture

In over a century, we have not experienced a default. In more than a century, there has never been a failure by a clearing member to meet a performance bond call or its delivery obligations

Famous last words-- I think some of the Ibanks that went down during the beginning of the financial crisis thought the same to some degree-- where there's smoke there's fire.


Thu, 06/02/2011 - 12:17 | 1332625 monopoly
monopoly's picture

It must be obvious to most by now that we do not have free markets anymore. That will increase the selling. FAZ just amazing the last 24 hours.

Thu, 06/02/2011 - 12:14 | 1332632 monopoly
monopoly's picture

VIX is useless as an indicator. I never use it anymore.

Thu, 06/02/2011 - 12:16 | 1332646 Jack Mehoff
Jack Mehoff's picture

It has gotten to a point where they could careless of what the public thinks.

Thu, 06/02/2011 - 12:20 | 1332649 riley martini
riley martini's picture

 CME members definetly have skin in the game . It seems they have the Fascist amunity from any investigation.

Thu, 06/02/2011 - 12:47 | 1332766 Lord Blankcheck
Lord Blankcheck's picture

next up....CME excepts kindey for margin

Thu, 06/02/2011 - 13:46 | 1333075 NotApplicable
NotApplicable's picture

How long until the iPad 3 comes out and he has to sell the other one?

Thu, 06/02/2011 - 12:23 | 1332664 The Axe
The Axe's picture

VIX like many of these products are useless

Thu, 06/02/2011 - 12:25 | 1332677 WALLST8MY8BALL
WALLST8MY8BALL's picture

Kim Taylor is a Man Baby!


Thu, 06/02/2011 - 12:24 | 1332680 WonderDawg
WonderDawg's picture

I wondered about this yesterday. I'm no trading genius or market guru, but I was wondering: they lowered margins two days ago, and we had a sell off yesterday. If they wanted a somewhat orderly unwind, lowering margins would prevent margin calls on a somewhat strong down day, yes? Maybe they were given instructions to lower margins to prevent margin calls, as those giving the instructions knew a selloff was coming and wanted to prevent the margin calls that would result in panic selling. I know, it's tinny, but hell, it's hard not to put on the tin hat these days with all the bullshit manipulation going on.

Thu, 06/02/2011 - 12:37 | 1332719 Village Smithy
Village Smithy's picture

I think you're right on. What other explanation for this bizarro move could there be? Nice work.

Thu, 06/02/2011 - 12:30 | 1332689 GittyUP
GittyUP's picture

Longer term VOL is still flat and low. 


Thu, 06/02/2011 - 12:29 | 1332693 hedgeless_horseman
hedgeless_horseman's picture

It Is Time For The CME To Hike ES Margins To "Protect Investors"

Goose and gander are divorced.  They have moved on with their new lives, seperate but unequal in the eyes of the law.

Thu, 06/02/2011 - 12:30 | 1332696 RobotTrader
RobotTrader's picture

Margin hikes on all commodities will be coming any day now.

Looks like TPTB has thrown in the towel and are engineering a stock and commodity crash like 2008 so they can pick up "bargains" on the cheap again.

A close below 1300 could seal the deal....

Thu, 06/02/2011 - 12:42 | 1332723 lieutenantjohnchard
lieutenantjohnchard's picture

hilarity ensues when the unemployed part time contract 1099 processor opines on the market. you will remember it was but two short days ago that the flip flopper known as robottrader was shouting from the roof top never to fight the fed, go long in size, new highs are imminent and only fool bears would short the tsunami of all bull markets that is the usa stock market.

robottrader: making parody of himself daily at zh.

Thu, 06/02/2011 - 12:52 | 1332774 Whalley World
Whalley World's picture


Regardless of what others may say, you seem to know your stuff.  I am taking a test on the markets and can't find a definition on BADI, can you help please?

Thu, 06/02/2011 - 13:20 | 1332946 lieutenantjohnchard
lieutenantjohnchard's picture

a fool and his money shall soon part.

the poster known as robottrader doesn't take his own advice so why should you?

don't take my word for it. go back through the zh archives and research the man whose advice you seek.

he changes positions from day to day and sometimes post to post. even the proprietor of this site has mocked him in the past for his remarkable flip flops.

Thu, 06/02/2011 - 14:34 | 1333347 Whalley World
Whalley World's picture

Thanks for the info, now can you tell me what BADI means?


Thu, 06/02/2011 - 12:31 | 1332700 bob_dabolina
bob_dabolina's picture

I need some price targets from tmosely.

Fading his calls is a guarntee to make it rain bags of money....literally

....unfortunately I haven't seen him post anymore price targets/time frames as the embarrassment of being wrong so frequently has clearly become overburdening.

Thu, 06/02/2011 - 12:48 | 1332751 tmosley
tmosley's picture

What the fuck are you talking about?  I posted them for you, but you (wisely) declined to accept them, claiming that you had had your fun.  Silver then proceeded to rise.  But of course, that is called "volatility".

You want to bet against my calls in the paper market?  Bet against volatility.  Tell us how that works out for you, jackass.

I'm reminded of an episode of the Venture Bros.  THe boys father asked them to tell him if a light was on or off as he flipped switches on another console.  One boy said "It's on" then the other said "It's off", then the other said "It's on" and the other said "It's off".

The father facepalmed and said "That's called BLINKING".

You, like the boys, can claim how right you are all the time by just waiting, because volatility means it goes up AND down, and you can just point pick and claim you were right.  But the fact is, you are really just a fucking idiot.

Thu, 06/02/2011 - 12:52 | 1332777 bob_dabolina
bob_dabolina's picture

Ya know,

I have better things to do than argue with altruistic "biologists" on failing endeavors whom are self-proclaimed experts in finance related matters (yet, always seeming to be wrong)

Good luck with your sheering.

*infinite volatility is not a "prediction" it is a natural function of any market.

Thu, 06/02/2011 - 13:43 | 1333056 tmosley
tmosley's picture

lol, clearly you don't, because you keep yappin like a little dog.

Christ, and now you are saying infinite volatility is "natural".  Your agenda has never been clearer.

Thu, 06/02/2011 - 12:45 | 1332754 Bay of Pigs
Bay of Pigs's picture

Please let us know when silver bottoms as you called it perfectly last time around $33.


Thu, 06/02/2011 - 12:36 | 1332705 urbanelf
urbanelf's picture

I think I'm going to need two tinfoil hats.

Thu, 06/02/2011 - 12:45 | 1332735 Doubleguns
Doubleguns's picture

One copper collander will take the place of two tin foil hats. You can fill the holes in it with camoflage and hide your self also.

Thu, 06/02/2011 - 12:35 | 1332706 baby_BLYTHE
baby_BLYTHE's picture

Peter Schiff said the 'bigger event' is coming after QE 2 stops. The largest collapse in U.S. History.

Football season may be cancelled this season due to labor struggles.

Bet on civil unrest in the fall. It is going to be brutal. The military police are ready (many hardened to core from multiple tours in the Middle-East). They are licking their lips and salivating at the thought of putting down fellow Americans.

TPTB print the money to pay their salary. Since our side cannot do that, we will have to make due with the 2nd Amendment and the minimal firepower our side can throw back.
It really is unprecented though, if you think about it. During the 1700s, the fire power was pretty even on both sides. Now with the technology advances, we will have a much harder fight.

Good luck to everyone

Thu, 06/02/2011 - 12:39 | 1332727 Vic Vinegar
Vic Vinegar's picture


Thu, 06/02/2011 - 12:55 | 1332813 baby_BLYTHE
baby_BLYTHE's picture

Ya, not understanding what is so funny about economic Armageddon.

Either you believe the FED saved us or you look at history which shows every single time a government has resorted to printing money (in the case of the US over 70% of our debt) has always ended in absolute disaster.

Thu, 06/02/2011 - 13:01 | 1332830 Vic Vinegar
Vic Vinegar's picture

If you were to take a "which Dawson's Creek character are you?" quiz, I would peg you for either a Jen Lindley or her naughty friend, Abby.

Get your guns, baby b!  American troops are chomping at the bit to put a boot on you!


Thu, 06/02/2011 - 13:05 | 1332849 baby_BLYTHE
baby_BLYTHE's picture

Good luck with that

Thu, 06/02/2011 - 12:45 | 1332734 wombats
wombats's picture

It is way too soon to suggest that the NFL season will be cancelled!  Sure, it's a possibility, but I'm sure when September nears all sides will realize that there is too much to lose by not reconciling.

I sure hope your pessimism does not come to pass with civil unrest.  I too am guarding my 2nd Amendment rights as a precaution, but I still believe that in the end we will not see significant unrest or moves against the people by the gov't.


Thu, 06/02/2011 - 12:53 | 1332781 Vic Vinegar
Vic Vinegar's picture

The problem, wombats, is you and I aren't real revolutionaries like baby blythe.  When I was in college, I was watching Dawson's Creek (OK - admittedly that was lame).  BB was busy "burning FRNs" and listening to Gerald Celente.


Thu, 06/02/2011 - 13:12 | 1332892 wombats
wombats's picture

Vic, I'm not sure what "burning FRNs" means.  Please define it if you get a chance.

I am starting to believe that BB and folks like her may be right.  I know I'm late with this since I've always believed America was the best, but I've come to realize that the current system is completely corrupt and rigged in favor of the political elite and the Wall Street oligarchs.  It really looks like a fasciest state and the people need to rise up and stand for their rights that were once guaranteed through the constitution.  It will be interesting to see how the mass of the people react.

Thu, 06/02/2011 - 13:30 | 1333008 Vic Vinegar
Vic Vinegar's picture

Baby and her friends lit federal reserve notes on fire in college.  I don't know if they were all hopped up on Gentleman Jack at the time or not.

Perhaps in the past, the system was only partially corrupt and rigged in favor of the elite and Wall Street oligarchs.  Or perhaps it was always completely corrupt. 

Man has government and man has money.  Not too surprising that some peeps found a way to exploit these two things, now is it?

Thu, 06/02/2011 - 13:13 | 1332907 baby_BLYTHE
baby_BLYTHE's picture

Believe it or not I was actually at that Ron Paul rally in 2008 when a group of people in the crowd started burning FRNs. Soon after, pretty much everyone else joined in.

What a glorious feeling. It is really to bad that some of the more influential founders have to be depicted on Federal Reserve toliet paper.

Thu, 06/02/2011 - 13:48 | 1333088 wombats
wombats's picture

I really hope Ron Paul and his message gain lots of traction this time.  It is time to stop draining the treasury on endless wars and printing money for TBTF Wall Street firms.

Thu, 06/02/2011 - 13:48 | 1333079 knowless
knowless's picture

getting worked up about when it happens will just dull your mind with paranoia, instead of allowing yourself to be aware of the moment when it arrives. but im guessing sooner rather than later as well.

Thu, 06/02/2011 - 12:40 | 1332718 user2011
user2011's picture

I am guessing they won't change the margin for ES until the second and third of slaughtering completes.

Right now, the market is still hanging around without taking the second dump, it means there are still tons of money on the table.


After a second and third crashes within this month, they will increase the margin limits. I won't be surprised to see stock market crash to halt within two weeks.  Those guys will try to gouge as much as possible before the collapse. 



Thu, 06/02/2011 - 12:44 | 1332731 cougar_w
cougar_w's picture

The best and perhaps only way to protect investors is to lock them all in padded cells.

Thu, 06/02/2011 - 12:45 | 1332757 Standard Deviant
Standard Deviant's picture

Try looking at Bollinger Bandwidth for a 3 standard deviation band. This would show roughly the size of a band needed to contain 99% of all daily moves (CME's stated goal in setting margin). From this chart: you can see that the level is quite low and seems to be getting lower.  

Thu, 06/02/2011 - 13:11 | 1332891 Standard Deviant
Standard Deviant's picture

By comparison, this shows why the hikes in silver made sense:

Thu, 06/02/2011 - 12:49 | 1332773 Eric Cartman
Eric Cartman's picture

Vol can mean volume or volatility and we do not all have bloomberg terminals. Perhaps you can complete your words. That would be appreciated. 

Thu, 06/02/2011 - 12:56 | 1332817 Eric Cartman
Eric Cartman's picture

I think we are all reading a little to into this. C'mon, that is not much of a jump. 

Thu, 06/02/2011 - 13:03 | 1332865 user2011
user2011's picture

Right now @ 1:00pm EST,  dow recovered most of the lost and sitting at -30.   I am going to venture into the guess that Dow will be closing at triple digit lost today.

Just a guess on how they are going to play the game of sheep slaughtering.

Thu, 06/02/2011 - 13:35 | 1333039 AldoHux_IV
AldoHux_IV's picture

Funny how the margin adjustments work out in favor of the manipulation-- can push around commodities to get the desired reactions for the TPTB-- ironic though how CL recovered much quickly compared to PM's.

Thu, 06/02/2011 - 17:08 | 1333963 longorshort
longorshort's picture

Is anyone going short ES long term here yet?  If so what % in are you going and what are you entry and exit strategies?   Alsois there a setting in IE 9 to fix this text box besides teh disable rich text?

Thu, 06/02/2011 - 23:03 | 1334741 Mediocritas
Mediocritas's picture

Perhaps the reason for lowering margins was to encourage more people to BTFD at a time when it looks like the Fed might back off on QE and tighten monetary policy. In other words, the aim is to dampen a selloff.

What would be damn funny would be if it had the exact opposite effect. Lower margin requirements work in both directions.

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